One-size Bankruptcy Reform Doesn't Fit All

March 20, 2005|By DAN HAAR

Some years ago, a family member filed for bankruptcy protection, and it's a tough call whether his tens of thousands of dollars in debt were the result of profligate spending or circumstances beyond his control.

These things rarely fit an easy pattern.

Likewise, the steady expansion of personal bankruptcy cases over the last decade -- roughly doubled, to 1.6 million last year -- is the result of all sorts of forces. The rising ranks of uninsured, combined with out-of-control health costs, is the largest factor.

Also, at a time when family income is losing ground, the credit card and lending industry makes matters worse by relentlessly pushing risky credit and piling on hidden fees.

And it's true, as bankruptcy reformers argue, that the old brake on bankruptcy filing -- shame -- is as quaint as a corsage on a movie date.

Into this maelstrom, the bankruptcy reform act speeding toward passage in the U.S. House and the certain signature of President Bush tries to shoehorn the issue into a neat set of strict rules.

Underlying it is the assumption that too many people abuse bankruptcy, leaving the rest of us to foot the bill.

The result is a poorly crafted answer, and not only because it punishes countless families who are not abusing the system by locking them out.

The reform act -- like so many of its Bush-era cousins, such as the Patriot Act and the No Child Left Behind Act -- replaces flexibility for judges with rigid rules governing regular consumers, but gives powerful interests all sorts of leeway.

``The untold story in all of this is the complicity of the credit card companies, and they really want to sweep that under the rug,'' said Patricia McCoy, a University of Connecticut law professor specializing in consumer finance, banking and securities.

More than two-thirds of personal bankruptcy filers seek and receive total liquidation of their debts, meaning they give up most of their assets, but don't have to live under a strict payment schedule.

That would change under the bankruptcy reform bill.

Its centerpiece is a blunt instrument -- a ``means test'' -- that would deny Chapter 7 liquidation of debts to any filer with more than median income who has $100 a month to pay back creditors. Those filers would be forced into a three- to five-year repayment schedule known as Chapter 13.

The Chapter 13 rules would tighten considerably, allowing less reduction of debt and much less non-essential spending by families.

For example, spending on private or religious schools would be limited to $1,500 a year, effectively barring that option because there are no such schools that charge so little.

Knee-jerk responses aside, mounds of evidence show that most families filing to escape debt, though not all, have already exhausted thousands of dollars in good-faith attempts to dig out. Their woes have almost always resulted from a crisis such as divorce or illness, rather than simply a shortage of discipline at the cash register.

``This bill seeks to shoot a mosquito with a shotgun,'' said a group of 92 professors of bankruptcy and commercial law whose letter to two U.S. senators is posted on the website of the American Bankruptcy Institute.

(The letter and names of those who signed, along with other information on the bill, can be found at http://abiworld.net/bankbill/) As McCoy suggests, the bill comes with some very weak curbs on abuses by lenders, curbs that should have been a much bigger chunk of the answer.

And so what we have, typical of the divisive Bush era, is one side saying the reform act is a bald gift to a greedy credit card industry, which earned $31 billion last year and heavily bankrolled Congress and the White House.

The other side -- the side that's about to win this war -- is saying at last we have sensible controls on billions of dollars of abuse.

I rest mostly in the first camp, for what it's worth. But hear this, fellow liberals:

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 did not receive 74 votes in the U.S. Senate because our denizens in the Capitol were bribed by a band of influential money-changers.

The rise of personal bankruptcies, more than double in the last 10 years, reveals problems and abuses on both sides of the courthouse steps.

McCoy, who recently completed a three-year stint on the Federal Reserve Board's advisory council on consumer finance issues, is right on target when she says the reform act fails to strike the right balance.

``I am very concerned about the increased incidence of bankruptcies, and I do think it's important for people to not get in over their heads. But we need to understand that it takes two to tango,'' McCoy said.

Looking at what's aimed at the credit card industry, McCoy notes that the deepest reforms are still missing, although there are some modest steps.

The law would force credit card companies to state on customers' monthly bills how long it would take to pay off a theoretical balance if the customer paid only the minimum amount due.